Blog
The evolving journey of ESG
Monday 31st July 2023
The ESG narrative over the past 5 years will continue to evolve significantly when considering the next 10 years ahead. To make the best optimal decision when choosing an ESG platform, firms need to understand, where ESG was, where it is now and where it will be in the future.
Where ESG was
Although the principles of responsible business or stakeholder capitalism have always been around, the foundations of today's ESG started early to mid-2000's. Initially treated by many as a sort of CSR-(Corporate Social Responsibility)-on-steroids, firms started sharing the outcomes of their sustainability successes around 2012. Building on CSR reports and with little regulation, companies typically selected those things that helped project them positively to their stakeholders, and in particular their investors. Narratives were mainly driven by PR teams, with subjective analysis to reinforce them. Data collection was typically selective, manual and ad-hoc, leaving the potential for narratives to being prone to bias, inflation and /or errors. There was a strong sense in some quarters that this was just another fad that was a distraction from the business of creating shareholder value that would in time pass by.
Worryingly, business valuations were being based on ESG ratings that were in turn based on inconsistent, selective, and hard-to-compare data. So, with positive sustainability improving ESG rating scores, combined with the difficulty of accurately auditing publicly shared information, we have seen the growth of message inflation: the practice of 'greenwashing' or 'impactwashing', which sadly is still prevalent especially where it is difficult to check the integrity and accuracy of published narratives.
Where ESG is now
Regulators needed to step in, and we have seen rapid change over the last few years with the introduction and proliferation of voluntary frameworks, their subsequent convergence and the recent ongoing development of mandatory standards in various jurisdictions. Much like financial reporting, these regulations and frameworks aim to create clarity, consistency, integrity, and comparability about what is reported and how it is reported. This means any success stories and information on a firm's sustainability performance and practices need to be grounded in accurate, timely and reliable data, verified, formally disclosed, and signed off by the leadership team.
As companies are now being driven by making more formal disclosures, this has created a need for better data hygiene, and we are seeing a proactive transition to increasingly automate previously manual data collection and reporting. Hence the rise of many new bolt-on technology platforms that offer integrations such as carbon calculators which work with a company's existing systems, tools, and platforms, and make data collection easier.
Although this is improving the data collection and processing efficiency of ESG disclosures, the underlying data still can be questionable, relying, as they tend to, on multiple approaches across numerous loosely integrated systems, with long and complex audit trails.
This lack of governance will increasingly become an additional risk to mitigate as more regulatory requirements are introduced that the leadership team will need to confidently sign off on.
Where ESG will be in the future
ESG presents a perfect opportunity for wider Business Transformation.
However, this evolution will require firms to go beyond seeing ESG as a data hygiene exercise or somehow separate to the core business, given it is very sensible to embed ESG strategies and operational activities at the very heart of their organisation, so it is part of their culture.
Also, that as current ESG demands are being driven by reporting disclosures, many leadership teams can be forgiven for understandably thinking they simply need to seek automation and system integration of their current systems will help delivering current disclosure reporting.
However, as the direction of ESG transition over next 3 to 5 years will be around embedding ESG as part of the company's strategic thinking and integrating outcomes in operational activities, it would be better to start thinking about using those few ESG digital workplace platforms such as myConsole that deliver automation at the very heart of the organisation, rather than adding on an array of bolt-on data capture tools and ad hoc reporting solutions that draw data from existing systems.
The future of ESG needs data Architecture at its core
To embed ESG at the heart of an organisation ESG needs to be a core component of your data architecture, and not an unproductive monthly headache or annual challenge to gather data and undertake multiple levels of separate analytics. Current sustainability performance across all ESG activities aligned to strategic vision and purpose should be all there and available in real time so that any disclosure or report requirement can be drawn off without effort or fuss. If this issue is not grasped at the outset, then the increasing regulatory challenges, such as capturing ESG data from across your stakeholders, supply chains or eco-system, will make life very difficult for your operational teams as well as your board members who will need additional meetings, interventions, and deep dive audits to give them the confidence in signing off any disclosures as 100% accurate. Firms not using an entire end to end ESG platform will have to accept there will be additional risk mitigation steps to ensure their disclosures are robust and accurate.